Stretched equities make absolute funds appeal: Managers

Fund managers focused on absolute return say expensive New Zealand equities markets that are looking more and more tightly stretched may turn more investors around to their way of thinking.

Monday, April 4th 2016, 6:00AM

by Susan Edmunds

Stephen Bennie, co-founder of Castle Point, said while absolute return funds could suffer in a bull market, when it paid to be fully invested, if things started to look less certain, they would outperform.

In the latest Aon investment survey, Castle Point’s balanced fund was the only one with a positive quarterly return, although it lagged others in three- and five-year returns.

It returned 0.2% over the quarter, and 6.6% over three and five years, compared to Milford’s 11.7% over three years and 12.2% over five.

Bennie said not having to work against an index gave a fund more freedom.

“When the music stops, we’re taking a steadier path. If an asset you’re invested in drops 50% you’ve got to make 100% to get back to where you were.

“The bull market is in its seventh year. It’s been great to be in more fully-invested traditional products while the returns are good and clients have had a good run but in different markets, absolute return investments fare better.”

He said there was increasing anxiety as investors understood bull markets could not continue forever.

“A different approach could pay dividends if we do see the market environment change and there are signs that is happening. Traditional balanced funds with big allocations to New Zealand shares have experienced really good returns but there’s only so far that can get stretched before mean reversion comes back.”

Salt Funds Management's Matthew Goodson said New Zealand's equities market was "extraordinarily" expensive relative to history.

He said large-cap stocks were driving that.

“At some point you’d expect some mean reversion in valuations. Funds with an absolute return focus should outperform. The Salt long-short fund aims to turn out a positive return irrespective of whether markets rise or fall.”

Goodson said the New Zealand market had changed over recent years because more off-shore investors were taking a passive approach. That meant when a New Zealand company joined an off-shore index, there were large amounts of forced investor-buy in.

“Or if a company goes into a large ETF there are huge in-flows, disconnected to the fundamentals of the company. When there is a risk-off period in the market you see forced selling by those people who are forced buyers at the moment.”

He said buyers were winning for now. “But that can change at any minute.”

Tags: Castle Point Salt AM